On today’s Fundwise live show, our first question comes from one of our clients in Texas. This client has a question about the different loan types. Sometimes you can take a five-year term loan, similar to a car loan, where you take the money and start making payments. Other times you can get revolving credit like a traditional-like credit, or a 0% credit line, or a business credit card that are revolving, you only pay on it if you use it. This client’s question was, “How do I know if I should take the term loan or just the revolving or both?” That’s a great question! The answer breaks down like this:
If you’re starting a brand-new business and you know you’re going to have to buy a fixed-cost equipment item. Say, for instance, computers, and you know it’s going to cost you $15,000-30,000 and no if, and’s, or but’s, your business doesn’t get started without them. At this point it makes sense to take an unsecured, 5-7 year term loan because you know you need it. You get the money now and you’re going to have to start making payments, but that’s okay because you know you need it.
Say you also know that 6-12 months you might need another 20-30k for marketing, or staff hiring, or additional inventory. This is when that revolving credit is going to make a lot of sense. For a term loan, you take the money and make payments on. Revolving credit you can use when you’re ready for it. So the question then becomes “When should I not take that term loan and maybe only get the revolving?” and that’s kind of in one of those situations where you know you need funding, but you don’t need it yet. If you get the term loan you’re going to have to start making payments and paying interest on it that first month, and it might be 3 or 4 months before you actually need the money. This is where it makes more sense to take revolving credit funding that’s available for you when you need it, that you’re not having to make payments on it until you’re actually ready. So that’s kind of the differentiation between a term loan and a revolving credit loan with that type of funding.
This is an especially important question for those of us in real-estate investing. For real-estate investors, often you have a cash need quickly, and in a lot of cases it makes sense to take both the revolving credit as well as the fixed, term-loan all the way to 30, 40, 50k. There are certainly instances where it makes sense to take both even if you don’t have everything ironed out. For real-estate and trucking, you never can have too much money. Seems like those two industries always need access to as much capital as possible to make the best profit.
So the bottom line of it: if you’re going to take out a fixed rate term loan for 3-7 years, you need to know where it’s going. If you don’t know where everything’s going and expenses will be a few months down the road, then go ahead and take a revolving line of credit. The great thing about revolving credit is that often you can get it at 0% interest, and 0% interest is fantastic because all of your payments go 100% principle that first year! There is no more powerful tool to build your business than that 0% funding.
If you have any more questions please send them over Facebook live or email them to [email protected]. Go ahead, take action to grow your business, and make it happen!